Logan Ridge Finance Corporation (LRFC) Earnings Call Transcript & Summary

Good morning, and welcome to today's call announcing the proposed merger of Portman Ridge Finance Corporation and Logan Ridge Finance Corporation. [Operator Instructions] I would like to note that a press release was distributed earlier today and should be viewed in conjunction with this call. Additionally, management will be referring to a slide deck that is available on Portman Ridge's and Logan Ridge's respective Investor Relations websites and was published concurrently with the announcement of the proposed merger. 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 that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. All forward-looking statements reflect each of the company's current views with respect to future events and are subject to risks and uncertainties and assumptions have been made in drawing the conclusions included in such forward-looking statements. All statements other than historical facts, including statements regarding the expected timing of the closing of the proposed combination and the expected benefits of the proposed combination are forward-looking statements. Actual results could differ materially and the companies undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation and Logan Ridge Finance Corporation. That I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge and Logan Ridge and Head of BC Partners Credit Platform. Please go ahead, Ted.

Good morning, and welcome, everyone. We're excited to be here today to discuss the proposed combination of Portman Ridge and Logan Ridge. As part of this proposed transaction, Logan Ridge will merge with and into Portman Ridge with Portman Ridge being a surviving entity following the completion of the proposed merger and will continue to trade on the NASDAQ under the symbol PTMN. The combined entity will continue to be managed by Portman Ridge's current investment adviser, Sierra Crest, an affiliate of BC Partners Advisors. Today, I'll start off by walking you through the key details of the proposed merger and what we believe it means for both Portman and Logan shareholders, share some insight into the strategic rationale behind this combination, and then provide some color on the expected near- and long-term value creation that we believe this transaction has the potential to generate for shareholders of both companies. At the end of the call, we will host a Q&A session to field any questions you may have regarding the proposed merger. I believe most Logan Ridge shareholders are familiar with Portman Ridge and vice versa. For those who are unfamiliar with both entities, I will start this call with a short description of each. Portman Ridge and Logan Ridge are both externally managed business development companies that invest in predominantly first-lien loans issued to core middle market companies across a wide range of industries. Portman Ridge is externally managed by its investment adviser, Sierra Crest Investment Management LLC, while Logan Ridge is externally managed by Mount Logan Management, LLC, both of which are part of the broader BC Partners credit platform. Combination of these companies represents a significant milestone for BC Partners Credit Platform. We are very proud of what we've accomplished since the shareholders of Logan Ridge placed their trust and confidence in us when they appointed Mount Logan to serve as the investment adviser to Logan Ridge over 3.5 years ago. Mount Logan Management became the investment adviser to Logan Ridge on July 1, 2021. And since Logan has been managed alongside Portman Ridge, co-investing many of the same BC-originated financings while management judiciously rotated Logan Ridge out of its legacy portfolio. During this period, the management team has transformed Logan's portfolio by substantially reducing the non-income producing legacy equity exposure, reducing Logan's exposure to non-accruals and significantly increasing the portfolio's diversification and growing Logan's exposure to first lien credits originated by BC Partners. Importantly, by the time this transaction closes and barring any unexpected repayments, we expect that more than 70% of Logan Ridge's portfolio at fair value will be in the portfolio of companies originated and underwritten by the BC Partners Credit Platform and the substantial overlap with Portman. Additionally, we've materially lowered Logan Ridge's cost of debt, capital and lowered its operating expenses. The collective results of these efforts has been the stable and growing operating earnings at Logan Ridge has generated which in turn has allowed us to reinstate a stable and growing dividend for Logan shareholders. Importantly, Logan's management team did all of this against the backdrop of particularly challenging and uncertain market conditions. Today's announcement of the proposed combination represents the culmination of these efforts as we can finally do so in a manner that is expected to be accretive to earnings for both companies. Further, the merger will significantly increase the size and scale of Portman Ridge, which we anticipate will translate into increased trading volume and improve secondary liquidity, lower combined operating expenses, potentially greater access to more diverse sources of financing at a lower cost. As a result, we believe now is the right time to combine the companies. Moving on to the details of the proposed merger. On Slide 4, you'll see an overview of the transaction. The merger has been unanimously approved by the Boards of both companies following recommendations from their respective special committees. And since we last built sets of shareholders to approve the transaction as well, Portman and Logan Ridge Boards are also recommending that shareholders vote in favor of the proposed merger. If you turn to Page 6 of the presentation, you'll see the breakdown of the transaction value. Part of the transaction, Logan Ridge shareholders will receive 1.5 newly issued shares of Portman Ridge's common stock in exchange for each share of Logan Ridge common stock. Based on this fixed exchange ratio, excluding the impact of a tax distribution paid by Logan and using Portman Ridge's closing price of $16.68 on January 24, 2025, the merger consideration values Logan shares at $25.02 per share representing a 4% premium to Logan's January '24 and 2025 closing price of $24 per share and a 17% premium to the closing price of $21.43 per share on September 11, 2024, which was the date immediately prior to the announcement of Logan's successful exit with Nth Degree Investment Group, an important catalyst for this transaction. Further, in connection with and in support of the transaction, Portman's external adviser, Sierra Crest, has agreed to waive up to $1.5 million of incentive fees over 8 consecutive quarters following the successful closing of the proposed merger. Finally, immediately prior to close, Logan Ridge will declare a distribution to its shareholders for tax purposes equal to any remaining undistributed 2024 taxable income earned by Logan, which we expect to be approximately between $1.0 million and $1.5 million. Based on September 30, 2024, net asset values of each company and assuming a $1 billion tax distribution paid to Logan shareholders prior to close, Logan shareholders will receive merger consideration equal to approximately 98% of its September 30, 2024 net asset value. Moving back to Slide 5. I'll now share some financial highlights of the deal. First, the combined company would have total assets well in excess of $600 million, with a combined net asset value of approximately $270 million based on the company's September 30, 2024 balance sheets, adjusted for estimated transaction expenses. The combination is expected to be immediately accretive to Portman's NAV by 1.3% upon closing based on the company's September 30, 2024, net asset values and adjusted for estimated transaction expenses, but excluding the impact of the tax distribution. It is also expected to be accretive to the company's combined NII as a result of an expected $2.8 million of annual operating expense efficiencies, the incentive fee waiver previously discussed, as seen on Slide 7, the performance trends of Logan Ridge enhanced by the Nth Degree exit. Over the longer term, management expects the merger to provide further NII accretion through optimizing future deployment by a targeted use of its KeyBank and JPMorgan credit facilities, a potential lower cost of debt and improved financing terms through increased scale as well as continued rotation out of Logan Ridge's legacy nonyielding equity portfolio into interest-earning assets originated by BC Partners Credit Platform. The Proposed merger will result in the acquisition of a known diversified portfolio with significant portfolio overlap between the 2 companies. Portman and Logan Ridge employ the same investment strategy and the BC Partners Credit Platform has been allocating substantially similar for the same investments to both companies since Mount Logan Management became Logan Ridge's external investment adviser on July 1, 2021. As a result, barring any unexpected exits. Approximately 70% of the investments in Logan's portfolio at fair value are expected to be BC Partners-originated assets at the time of closing, with over 60% of the portfolio overlapping with Portman's. The combination of 2 known complementary portfolios originated and managed by BC Partners Credit Platform is expected to substantially mitigate integration risk. You can review the pro forma portfolio composition and rotation of Logan Ridge's asset mix on Slide 8 and Slide 9. As a result of the previous refinancing of Logan Ridge's credit facility with KeyBank, Logan Ridge has currently has additional availability available borrowing base that can be used for future deployment at the combined company. Logan Ridge's credit facility and Portman Ridge's existing senior secured revolving credit facility with JPMorgan Chase in place, the combined entity is expected to further optimize its debt capital structure. Looking ahead on Slide 10, you will see the tentative transaction time line. We expect to complete this merger early in the second quarter of 2025, subject to shareholder approvals and the satisfaction of other customary closing conditions. We will keep shareholders updated on progress as we move through this approval process. As many of you know, this will be the fourth merger transaction by Portman Ridge since Sierra Crest took over as investment adviser. The first being Portman's acquisition of Oak Hill Investment Corporation, which closed in December 2019, followed by Garrison Capital, which closed in October 2020. And finally, Portman's acquisition of Harvest Capital, which closed on June of 2021. Going forward, we will continue to execute on our strategy of targeting inorganic growth opportunities that we believe have the potential to be earnings accretive for shareholders of both Portman and Logan. I look forward to updating shareholders on the work management will be doing on this front over the course of 2025. Ahead of questions, I'd like to reemphasize how proud we are to be here discussing the proposed merger between Portman and Logan Ridge. The combination of these companies, it's a combination of diligent work management has put into transforming Logan Ridge's portfolio since taking over management 3.5 years ago. Thank you once again, and I can't reiterate this enough, to all of our shareholders for ongoing support and advice. This concludes our prepared remarks, and I will turn the call over for any questions.

[Operator Instructions] The first question comes from Paul Johnson from KBW.

My first question was just on the consideration that's being paid for Logan Ridge. It sounds like you're going to be acquiring it for 98% of its net asset value. I understand there's some adjustments applied to that as well. But can you -- can you just, I guess, help me understand how you guys are able to acquire the BDC at a discount to NAV? Or is there some sort of fourth quarter kind of NAV adjustment that's coming that sort of accounts for that difference?

Yes. So I'll start, and Brandon and Patrick can jump in. The' '40 Act requires -- a '40 transaction requires that any deal is "accretive" and so this deal is both NAV accretive and also earnings accretive and there is precedent for this in [ '40 X ] space in the non-BDC world. So it is something, obviously, that we've obviously got a lot of advice on this from numerous different parties and we feel good about the structure.

Yes. The only other thing I'd add, Paul, is within the rule of 17a-8, it says it cannot be dilutive, but it doesn't actually say that, that is on a NAV basis. So there -- historically, most of the mergers have happened on a NAV basis. But the SEC agreed with our interpretation that, that is not the only way to calculate accretion and dilution regarding 2 transactions. So that is sort of how you're able to do something like this without it necessarily being not NAV dilutive.

Okay. That's very helpful. I appreciate the explanation there. And then...

We can do a follow-up with you afterwards if you want to dig more into that.

Sure. Yes, that would be good. Maybe we can do that. And then just trying to understand the kind of expected accretion post closing, just so I understand that correctly, it sounds like 1.3% is kind of the expected accretion prior to any NAV distributions or tax distributions out of Logan Ridge. If we kind of adjust for that, what you would expect to be the tax distribution, I mean, the accretion should be probably less than 1.3%. Is there any way that you would -- you can provide like a range of what that accretion might be? Am I thinking about that correctly?

Technically, yes. I don't think it is material enough to really move the yield but we can circle back with the number. But it shouldn't -- you're right, but it won't -- I don't think it will move the number in a material manner.

Yes. It's over 1%, Paul.

Okay. Okay. Over 1%, including that distribution. And then just on kind of the NII accretion, there's obviously a pretty material expense savings that you pointed out with the G&A expense savings as well as Logan Ridge shareholders will be getting a little bit of a fee reduction as well. But can you just kind of help me to understand, I guess, how the deal would be NII accretive? If I'm just kind of comparing the 2 ROEs between the BDCs, I believe the most recent quarter ROE for Logan Ridge was below 5%. And Portman's is closer to about 12%. So obviously, a big difference in the operating ROE there. So can you just kind of help us understand, I guess, where the accretion would come? And would you expect that expense savings basically to offset any kind of dilution from just like a lower operating ROE?

Yes. I mean -- there's a couple of different components to it Paul. And obviously, we don't kind of put out projections and things like that. But as you think about Logan Ridge, there has been a continuous trend for the last several quarters of an increasing ROE within that company on a standalone basis. Again, we had a very, very material pay down, an exit of Nth Degree in sort of mid-September that brought in $15-ish million of cash that previously had not been generating any income for Logan Ridge. So if you took a very simple estimate of an extra $15 million of cash at work at some interest rate, you get a pretty material pickup in like the stand-alone earnings at Logan Ridge. And so kind of the combination of those 2 things really -- and a little bit of the fee waiver, but that's not really -- that's not really a driver on the accretion dilution, but a combination of those sort of 3 things kind of gets you the, let's call it, increasing ROE to Logan such that when you kind of put the 2 things together, we expect it to be earnings accretive.

Yes. So like it's just expensive to run a small public company. And so the cost savings of just that, this is expected to be earnings accretive for format.

Appreciate that. And then last question was just on the rotation of assets, I guess, that are kind of remaining in the Logan Ridge portfolio. I mean of the $176 million portfolio that's being merged in. What would you say, I guess, is kind of legacy assets at this point, assets that you'd be looking to probably rotate or continuing to look to rotate?

Yes, we've -- I mean -- sorry, I want to pull up the deck. But we've kind of shown it here on Slide 8, where, again, like on a combined basis as of 9/30, "BC assets" represent 78% of the combined portfolio. And so the sure answer would be, you could say it's the remaining 22% are things that we would be looking to "rotate out of. " The reality is it's something lower because even though the assets are, let's say, tagged to or an asset that we inherited from Logan or Garrison or whatever, that doesn't necessarily mean that we're looking to move on from the asset. But I think that on Slide 8, you could look at that and say, 78% of our portfolio are "our assets." And so that rotation number would be the remaining 22%. If you wanted to like reduce it down to that simplistically.

Seeing as there are no more questions in the queue. I would like -- I apologize. Yes, seeing as there are no more questions in the queue, I'll be sending the call back over to -- so I apologize. We have another question coming from the line of Erik Zwick from Lucid Capital.

Congrats on the approval for the merger there from the committee. One question just in terms of the proposed cost savings or the operating expenses. Can you just talk maybe about the timing and realization of those? Will those be pretty immediate? Or is there anything that will maybe take a quarter or two?

No. We fully expect those to be -- you to see those right away. Now maybe it may take a quarter to trickle through entirely depending on when we close in the quarter. But for the most part, they are -- we expect to see those immediately.

Yes, these are contractual, like it's Board fees, it's audit, it's tax, it's like -- it's admin fees. So you're going to get it right away. And it's not -- and there's no "execution risk." It's not like we have to go and bid out contracts or things like it's purely formulaic.

Our next question comes from the line of [ Lee Crockett ] He is a private investor.

Ted and Patrick, I was wondering if you could help me out in bridging from the 9-month NII at Logan Ridge to the what I calculated to be about $11 million to get to the NII to cover -- or to earn the current Portman dividend. I've got -- if you take the [ 2.7%, ] you annualize it to [ 3.6%, ] add the cost saves, add the waiver of the fee, I'm still coming up short to get to that number. Can you fill in the blank there with respect to what the additional revenue might be from selling the equity portfolio and reinvesting that?

Are you asking -- what number are you trying to solve for? Like the current dividend at Portman, is that what you're trying to get to? Or?

Well, you're going to issue 4 million shares, correct?

Yes, approximately.

So in order to earn the current dividend, you'll need about $11 million of additional NII from the transaction. Bridge me from the operating numbers for the 9 months for Logan Ridge to that $11 million, please?

I think it's -- Patrick highlighted the significant exit that we had at the end of September, so frankly, I don't think the 9 months ended NII at Portman is the appropriate base for evaluating the earnings potential of Logan's portfolio. I think once you...

And just to interject, so you take that $15 million exit, you could multiply it by our average yields and obviously add leverage to it. So it actually is pretty -- like because Logan is small, very small changes in dollars lead to big swings in NII. So if you take up 9 months and then you take that exit and you times that by our average yield and you put leverage on it, that will get you pretty close to where you need to get to.

And is the transaction accretive from an NII basis without the waiver of the fee?

Yes.

Yes.

And when you release a document, are you going to have more detailed information with all of this?

I mean we are very, very happy to follow up with each person one-off and go through the math. As I said earlier, like we don't -- we've never really provided projections, but the math is the math. Like it's pretty -- we can walk you through it. And if it's confusing at all, we really try to keep it simple in our investor deck, but we're very happy to get on the phone with you and walk you through it.

Appreciate that. I will follow up with that.

And to your point, I like just to be fair, like it is not -- I understand why it's not super straightforward. It's not -- I don't think you're missing anything. It's just we have -- we will walk you through it.

No, I understand that you need to sell additional of the equity portfolio and reinvested at, say, 12%, 12.5%. And as you pointed out, with leverage.

Yes. But I would say, even if we don't do that, this transaction's NII and NAV accretive.

I look forward to seeing numbers.

So to get to that accretion that was referenced earlier by Paul, we don't need to monetize a bunch of illiquid assets that don't yield. So I just want to make sure that's clear. So if you look at the SEC's definition, we think this is accretive today, based on what we know, we think this is accretive both on a NAV basis and an NII basis.

Okay. I will follow up with and look forward to you those details.

Thank you. Seeing as there are no more questions in the queue, I will now turn the call back over to Ted Goldthorpe for closing remarks.

Thank you all for joining today's call. We are very excited about the future of the combined company and the strategic benefits of this proposed transaction could do for both companies and their shareholders. As always, we appreciate your continued support, and we look forward to updating you further in the coming months. Please don't hesitate to reach out to any one of management with any questions you may have regarding the proposed merger. Thank you so much, and have a good evening.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.