Mount Logan Capital Inc. (MLCI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's Fourth Quarter and Year-End 2019 Results Conference Call. Before we begin, I would like to remind listeners that except for historical information, the matters discussed during this call may include forward-looking statements within the meaning of the applicable Canadian Securities Legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors 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 the company's current views with respect to the future events and are subject to risks and uncertainties and assumptions we have made in drawing the conclusions included in such forward-looking statements. The company is not obligated to update or revise any forward-looking statements, and we do not assume any obligation to do so. For a description of the risks associated with Mount Logan Capital's business as well as information about the material factors and assumptions that could cause results to differ from any forward-looking statements and other relevant factors, please refer to the company's public disclosure record, particularly the company's MD&A and Annual Information Form for the year ended December 31, 2019, which are available on SEDAR. I would now like to introduce your host for today's conference, Mr. Ted Goldthorpe, Chief Executive Officer of Mount Logan Capital. Mr. Goldthorpe, you may begin.

Thank you. Good morning, everyone, and thank you for joining us for our fiscal year 2019 results call. During the call, we'll be referring to information provided in the financial statements, the MD&A and the associated news release for the quarter, all of which are available on our website and on SEDAR. Joining me this morning is our Chief Financial Officer, Ted Gilpin. To recap our first full fiscal year of operations at Mount Logan Capital, it has been a year of growth, and we are -- and we plan on maintaining this momentum throughout 2020. Starting off in February 2019, we had entered into an agreement for our $50 million leverage facility, which enabled us to greatly enhance the yield on our underlying loan portfolio. The additional capital enabled us to scale and diversify our portfolio, ultimately doubling our total assets over the course of the year from $37.6 million at the end of 2018 to $75.3 million at December 31, 2019. While growing our portfolio, we also had a number of monetizations as we continue to refine the portfolio and opportunistically sell assets at attractive valuations. Since inception, we have had 10 full investment realizations, achieving a weighted average IRR of 16.6% with a 0% loss rate. As our portfolio has ramped, we've achieved record investment income with each quarter that has passed with $1.1 million of investment income for fourth quarter 2019. This past summer, we executed on our commitment to initiate our asset management vertical with the signing of our first asset management contract with a large U.S.-based insurance company. We continue to advance discussions on strategic partnerships that would drive recurring management fee income, and we look forward to progressing these partnerships in 2020. Moving to notable developments during our fourth quarter. We continue to deploy capital in new attractive investment opportunities, execute on our commitment to complete an 8:1 share consolidation and announced and paid our first dividend. For this first quarter of 2020, our Board declared another dividend of CAD 0.02 per common share, with a record and payable date set for April 2020. Before we review our financial performance for the year, I would also like to take the opportunity to speak on our perspective on the current market conditions, what it means for our operations, our portfolio and what opportunities the current market dislocation presents. 2020 has been an eventful year to date and the COVID-19 pandemic and related effects continue to present uncertainty and impact to global economy. In terms of our day-to-day operations, our team has a mix of employees working in the office and working from home. There have been no material disruptions to the way we manage and conduct our business. On the effect of COVID-19 on our portfolio, it is important to note that with no direct exposure to the most likely affected sectors, including auto, natural resources, leisure, hospitality, travel and airlines, our portfolio remains heavily concentrated in first lien senior secured debt. As of December 31, 2019, 79% of our portfolio, excluding Cline, consisted of first lien senior secured debt. We've purposely constructed our portfolio to focus on first dollar risk precisely to be well positioned when times of economic stress do arise. First lien debt has historically exemplified robust performance through economic cycles and demonstrates strong recoveries even under the most stressed circumstances. Breaking down the remaining 21% of our portfolio. 16% is invested in the Great Lakes Unitranche Joint Venture and 5% in a promissory note to a growing asset manager with the recurring fee streams and permanent capital. Our investment in the Great Lakes joint venture is underpinned by a portfolio of first lien senior secured unitranche debt diversified across middle-market borrowers and a variety of staple industries. Despite our confidence in the quality and diversity of our portfolio, we are aware that during these unprecedented times and amid this uncertainty, we are actively monitoring our portfolio of company's performance and speaking with our respective management teams and other industry advisers to ensure we have a full grasp of the risks that may develop in light of recent trends. As of now, although we may experience some mark-to-market volatility in our assets in a recent spread widening, we don't currently foresee any near-term impairment risk on any of our assets. While the markets are changing day-to-day and volatility and uncertainties seem to persist in investors' minds, there's a tremendous investment opportunity available in the market right now. Traditional financing sources have curtailed their appetite for lending, meaning there is a growing demand for providers of alternative capital like Mount Logan. Given there's less competition around financings, the private deals we are seeing now have both greater pricing and are structured with more protective terms. We have an unprecedented pipeline of new opportunities to provide liquidity to businesses indirectly affected by the recent economic developments at very wide spreads. There's also an immense opportunity in the traded loan market where a combination of COVID-19, declining interest rates and forced technical selling has resulted in syndicated bank debt trading down to levels that provide a very compelling risk-adjusted return. To share some data points around the recent turmoil in the syndicated loan market, the S&P/LSTA Leveraged Loan Index, the broad market index for U.S. leveraged loans, has declined nearly 20% year-to-date, and virtually all of that decline has occurred in March. As of Monday of this week, nearly 60% of the syndicated loan market is trading below $0.80 on the dollar. Contrast these pricing levels to the end of January when just 2 months ago nearly 50% of the index was trading above par. The current loan prices levels in the index are still above all-time lows, which were set December '08 at just above $0.60 on the dollar. However, the speed at which the loan prices have declined this time is unprecedented. Near-term recession risk, the U.S. Federal Reserve's rate cut, and a flight to quality has led to mass fund outflows and forced selling by a large number of loan market participants, including loan mutual funds, index funds and CLOs. We are thankful that Mount Logan's existing structure and permanent capital allows us to continue to hold our investments and does not force us to sell at a material discount to par. Amid the market sell-off, our team has dedicated significant resources to evaluate opportunities in the secondary traded credit market. We remain focused on identifying safe, strong, downside-protected first lien senior secured risk in a coronavirus and oil-isolated areas that have seen -- that have seen price declines due to overall market volatility. During our underwriting process for these loans, we focus on understanding the liquidity profile of the borrower and how a prolonged recession could affect the cash flow generation potential of the business. Overall, we are very comfortable with our portfolio composition and skewed towards first lien senior secured debt. We'll continue to remain vigilant around monitoring our existing investments, and we'll continue to actively evaluate additional new investments that present an immense opportunity amongst the recent market volatility. With that, I'll turn the call over to Ted Gilpin, who will review the financial results.

Thanks, Ted. Good morning, everyone. I will now summarize our key highlights for the 2019 fiscal year and the fourth quarter of 2019. As a reminder, effective January 1, 2019, Mount Logan changed its presentation currency from Canadian dollars to U.S. dollars to better reflect the company's business activities. Unless specified otherwise, all figures I will reference today are in U.S. dollars. In addition, to put the financial results in perspective, on a comparative basis, I wanted to remind everyone that we completed an 8:1 share consolidation on the common shares of Mount Logan Capital in December 2019. And now with 10.6 million common shares outstanding at a USD 3.23 NAV per share. We believe our resulting NAV and share price better reflect the institutional nature of our business. As to our results for the fiscal year ended December 31, 2019, we generated $3.5 million in total investment income, up from $596,000 in fiscal year 2018. Of note, while interest income remains our largest contributor to revenue at $3 million for the year, our investment in the Great Lakes Unitranche Joint Venture generated $442,000 dividend income. Our asset management activities generated $11,000 fee income for the year. The momentum in our business continues to become apparent as we achieved record quarterly investment income of $1.1 million in the fourth quarter of 2019. For the year, we recorded a net realized gain on investments of $620,000 due to the profitable realizations in the portfolio that Ted alluded to earlier on the call. During the year, we faced a net unrealized loss of $1.3 million on foreign currency translation. Specifically, we are required to convert our U.S. dollar-denominated securities into a Canadian dollar value at the time of purchase and then back into U.S. dollar value at the reporting period date. And in fact, the investment has been held in dollars for the whole period. Therefore -- or U.S. dollars for the whole period. Therefore, the unrealized gain or loss in the period thus reflects the changes in the relative value of the Canadian dollar versus the U.S. dollar during the period. To mitigate potential swings in unrealized gains and losses related to FX, we continue to explore switching our functional currency from the Canadian dollar to the U.S. dollar. On the expense side, professional fees related to legal, audit and tax consulting amounted to $593,000 during the year. Utilizing our leverage facility, Mount Logan incurred $1.6 million in interest and other credit facility expenses as a result of drawings under the loan facility. Other costs, including director's fees, regulatory and shareholder relations and other general and administrative costs were aligned with our expectations, although the fourth quarter saw slightly elevated operating expense levels when contrasted to the other quarters. Our total operating expenses for the year declined from $2.8 million in 2018 to $3.3 million in 2019, as the reduction in onetime transaction costs incurred in 2018 in connection with our original plan of arrangement transaction, partially offset by interest and other expenses associated with our credit facility incurred in 2019. For the year, our total and comprehensive income was $228,000 or $0.02 per weighted share -- average share, up from a loss of $0.04 per weighted average share in 2018. As of December 31, 2019, Mount Logan's balance sheet reflects total assets of $75.3 million, total liabilities of $41.4 million and shareholders' equity value rights had entitled holders to the net proceeds that are achieved from the sale of Cline or any distributions related to the investment. Sorry, excuse me, I missed a page, sorry. Shareholders equity of $34.2 million, resulting in net asset value per share of $3.23 is up $0.03 since September 30, 2019. The asset balance at year-end largely consisted of $64.5 million in investment portfolio, $7.1 million balance in cash and restricted cash and $2.9 million in a deferred tax asset. Liabilities predominantly include our leverage facility with outstanding balance of $34.4 million and the fair value of the Cline investment associated with the contingent value rights. On January 31, we entered into an amendment to extend the maturity of our leverage facility for another year from February 2020 to February 2021, providing us with another year of flexible financing which provides enhanced yields on our underlying portfolio. As a reminder on Cline, this is an investment in equity and debt that remains from Marret Resource Corp. prior to the plan of arrangement. As an update, in January 2020, Cline announced that they had entered into a binding agreement to sell their shares in the New Elk Coal Company to Allegiance Coal for total consideration of CAD 55 million, consisting of cash debt and equity in a transaction that would close prior to July 15, 2020. As a reminder, the change in value in Cline does not directly affect Mount Logan, rather, former Marret Resource shareholders hold contingent value rights and entitled to holders to net proceeds that are received from the sale of Cline or any distributions related to the investment. With that, I'll turn the call back over to Ted Goldthorpe for some closing remarks.

Thanks, Ted. Overall, we are pleased with our results for the year, and look forward -- we look forward to continuing to assess opportunities to raise capital and other strategic options that allow us to grow book value. We know this is an uncertain time. We have conviction in the quality, security and diversity of our underlying portfolio and believe we are very well positioned to take advantage of the current market environment. We will now transition the call to Q&A. If the operator could please coordinate.

[Operator Instructions] We don't have any questions coming through just yet. [Operator Instructions] We do have a question coming through. The first question comes from the line of Charles Burns calling from CIBC WG.

It looks like the results continue to perform as I expected. And I just wondered, how do you see the trading price compared to the net asset value? How's the best way going forward to narrow that gap? Because it is a pretty substantial gap.

Yes. No, it's a great question. And obviously, we own a lot of stock, too, so we're laser-focused on generating shareholder value. I think if we just continue to perform, and the real test of any of these franchises, what's happening now. We're going through, in many ways, a credit environment worse than 2008. And so I think our portfolio, hopefully, will withstand the test of a tough market shock. And I think if we can just consistently generate results and continue to grow book value, which we've done pretty consistently, that gap should obviously narrow. So I think if we just keep -- I think it's all about execution, keep executing and continue to grow and make -- get the stock a little bit more liquid, I would say.